Friday, December 30, 2016

The recent release of the
Department of Homeland Security's report on
Russia's "malicious cyber activity" provides us with an analysis that
proves the guilt of America's former Cold War adversary for actions that it took during the 2016 American election. The analysis is
supposed to provide "...technical details regarding the tools and
infrastructure used by the Russian civilian and military intelligence
Services (RIS) to compromise and exploit networks and endpoints associated with
the U.S. election, as well as a range of U.S. Government, political, and
private sector entities." As it does in its combat
operations around the globe, Washington has even given these
operations by RIS a clever name; GRIZZLY STEPPE.

One of the most interesting bits of information that DHS provides in this report is found right at the top of the first page:

The disclaimer clearly
states that the report is provided on an "as is" basis and that
the Department of Homeland Security "...does not provide any
warranties of any kind regarding any information contained within."

One would think that such
a boilerplate disclaimer would not be necessary if the Department of
Homeland Security and the National Cybersecurity and Communications Integration
Center (NCCIC) were certain of the "facts" stated in the report, particularly given that its findings are driving the Washington's anti-Russia agenda.
This is looking more and more like the kind of propaganda that was used
by Washington in the decades after World War II to justify their spending of
trillions of dollars on arming America for the Cold War.

In this, my last posting
of 2016, I want to examine the story of the year, the rather miraculous
performance of the U.S. stock market, particularly since Donald Trump's surprise
win in November.

Here
is a chart showing the one year performance of the Dow Jones Industrial
Average:

During the first two months of 2016, Dow fell from its 2016 opening level of 17,405 to a low of 15,460 on February 11.
It rose to its 2016 high (and all-time high) of 19,987 on December 20, an
increase of 14.8 percent from its 2016 opening level. It has retreated to its closing level of 19,762 on December 30, however, the index still shows a year-over-year gain of 13.5 percent. Since corporate earnings are a key part of stock growth, by way of comparison, here is what happened to growth in after-tax corporate profits on a year-over-year basis since the beginning of the Great Recession:

Profits in the third quarter of 2016 grew by 4.3 percent on a year-over-year basis, the strongest growth rate since the third quarter of 2014.

"...the price of
stocks (or the stock market as a whole) divided by the moving average of ten
years of earnings adjusted for inflation."

Higher than average CAPE
Ratios suggest that there will be lower than average long-term annual returns
and lower than average CAPE Ratios suggest that there will be higher than
average long-term annual returns on stocks.

Here is a line graph
showing how the CAPE Ratio has varied on a monthly basis since 1881:

There are 1631 data
points in Dr. Schiller's analysis which provide us with an average CAPE Ratio
of 16.63 over the 135 year period keeping in mind that this includes
the extremely anomalous CAPE Ratios that resulted from the tech
sector bubble in the early 2000s.

Let's focus on the period
of time since the Great Recession began at the end of 2007:

As you can see, the CAPE
Ratio fell to a low of 13.32 in March 2009, the lowest level since March 1986
when the CAPE Ratio stood at 13.19. Over the past six and three-quarters
years, the CAPE Ratio has risen to its current level of 28.26 in
mid-December 2016, an increase of 112.2 percent. That said, the
current CAPE Ratio is very high compared to the long-term average, in fact, at
28.26, it is 69.9 percent above its 135 year average as noted above.

The current level of the
CAPE Ratio suggests that the stock market is significantly
overvalued, unfortunately, the CAPE Ratio does not telegraph when the
stock market will return to normal valuations. My suspicion is that
the flight out of the bond markets have led investors into equities and
that only time will tell when sanity returns and market valuations better
reflect the reality of stagnant profit growth.

Thursday, December 29, 2016

While those of us who
live outside of Russia rarely actually hear what Russia's political leadership
has to say about its relationships with western nations, a quick trip to the
Ministry of Foreign Affairs of the Russian Federation will provide us with a
glimpse at the inside workings of Russia.

This is particularly
pertinent given Barack Obama's December 29th, 2016 announcement about
additional sanctions being placed on Russia for their supposed role in the 2016
election that saw his party's candidate, Hillary Clinton, suffer a humiliating
loss at the hands of the supposedly unelectable Donald Trump.
Fortunately, Russia had already preemptively commented on the imposition
of additional sanctions on December 28th, 2016. Here is the comment on the situation from
Russia's Foreign Ministry Spokesperson, Maria Zakharova:

"The outgoing US
administration has not given up on its hope of dealing one last blow to
relations with Russia, which it has already destroyed. Using
obviously inspired leaks in the US media, it is trying to threaten us again
with expansion of anti-Russian sanctions, “diplomatic” measures and even
subversion of our computer systems. Moreover, this final New Year’s “greeting”
from Barack Obama’s team, which is already preparing to leave the White House,
is being cynically presented as a response to some cyber-attacks from Moscow.

Frankly speaking, we are
tired of lies about Russian hackers that continue to be spread in the United
States from the very top. The Obama administration launched this misinformation
half a year ago in a bid to play up to the required nominee at the November
presidential election and, having failed to achieve the desired effect, has
been trying to justify its failure by taking it out with a vengeance on
Russian-US relations.

However, the truth about
the White House-orchestrated provocation is bound to surface sooner or later.
In fact, this is already happening. On December 8, US media quoted Georgia’s
Secretary of State Brian Kemp as saying that the local authorities tracked down
the origin of a hacker attack on his voter registration database after the
election. The attack was traced to an IP address of the Department of Homeland
Security. This was followed by an attempt to quickly cover up this information
by a flood of new anti-Russian accusations that did not contain a single piece
of evidence.

We can only add that if
Washington takes new hostile steps, it will receive an answer. This applies to
any actions against Russian diplomatic missions in the United States, which
will immediately backfire at US diplomats in Russia. The Obama administration
probably does not care at all about the future of bilateral relations, but
history will hardly forgive it for this après-nous-le-deluge attitude." (my bold)

In case you were wondering, apres-nous-le-deluge translates to "after us, comes the flood" and refers to someone who acts irresponsibly without caring about what impact their actions will have in the future. In this case, it refers to the outgoing Obama Administration and the incoming Trump Administration.

It looks like it's more
business as usual in the ongoing ramping up of hostilities between the United
States and its former Cold War adversary.

Addendum - December 30, 2016Here's what the Kremlin had to say after the Obama announcement of December 29th:"Reserving the right to retaliate, we will not stoop to the level of "kitchen" irresponsible diplomacy and further steps to restore U.S.-Russian relations will build on the basis of the policy, which will hold the presidential administration of D. Trump.

Returning
to his homeland, Russian diplomats will spend the New Year holidays in the
circle of relatives and friends - at home. We will not create problems for
American diplomats. We will not send anyone home. We will not prohibit
their families and children to use for their usual vacation spots in the New
Year's holidays. Moreover, all children of American diplomats accredited
in Russia, I invite you to New Year's and Christmas tree in the Kremlin.

It is a
pity that the President Obama administration completes its work this way, but,
nevertheless, I congratulate him and wish his family a Happy New Year." (my bold)

Updated July 2017A December 2016 Department of Defense press briefing on
the situation in Afghanistan by General John W. Nicholson Jr., Commander of
Resolute Support and the United States Forces in Afghanistan, provides us with a
glimpse into the current anti-Russia sentiment that is becoming pervasive
throughout Washington. As you will see, in this case, this anti-Russia
sentiment could end up costing American taxpayers a very significant amount of
money.

When the Afghanistan war
began in 2001, Afghanistan's fledgling Air Force included a number of aging Soviet-era
helicopters. Since the Afghani pilots had experience with Soviet
equipment, the United States made the decision to replace this aging equipment with Mi-17 helicopters purchased from
Russia and the Czech Republic with the deal being signed in 2011. The Mi-17 is a multi-use transport
helicopter that can operate at high altitudes and the United States had the
goal of purchasing at least 80 Mi-17s by the end of the acquisition program. By 2012, 50 Mi-17s had been
purchased and, according to the U.S. Army, by 2011, an additional 22 Mi-17s had been purchased for use
in Iraq and the existing 50 Mi-17s in Afghanistan were being serviced by
Northrop-Grumman, a massive U.S.-based military contractor. In November 2014, the Pentagon announced that the
last of 63 Mi-17s had been delivered.

Interestingly, the U.S.
Government Accountability Office did an
analysis of the Department of Defence's decision to cancel
competitive soliticitation for the purchase of 21 civil Mi-17s (along with an
option to purchase 12 additional aircraft) which would have been refitted with
a military configuration after delivery, even though this had never been done
previously. with the necessary materiel. As well, according to Human Rights Watch, the Department of Defense
likely paid too much for the helicopters; between 2008 and 2012, the price rose
from $4.4 million to $17,5 million. Here's a quote:

"The industry documents appear to show that the United
States is paying far more than most other countries for similar
helicopters. As was reported in today’s Wall Street Journal, a 2007 letter from the
factory in Ulan-Ude, Russia, offered to sell three new Mi-171E helicopters for
$8.55 million each. In 2009, the U.S. navy bought two Mi-171s for $10.5 million
from a contractor called Defense Technology Inc. The following year, Argentina
reportedly paid $12.7 million each for two Mi-171s. In 2011, the United States
paid $13.6 million each for 14 Mi-171s destined for Iraq. The price paid
by the United States was 40% higher than four years earlier – an eye-opening
markup given that bulk aircraft can usually be purchased at a lower price than
small numbers.

The Russian
price apparently jumped another 32% in a single year, when DoD bought 12 Mi-17
helicopters for Afghanistan for $18 million each. The Mi-17 V5 is equivalent to
the M-171 and the cost is roughly the same, industry sources said. A July
2013 Pentagon document indicates the Mi-17 choppers are now estimated to cost
$19 million each, with annual maintenance costs of $4.8 million, for a total
cumulative costs of $1.45 billion for 30 aircrafts over the 30-year lifespan of
the helicopter."

With that
background, let's go back to the subject of this posting, the recent press
briefing by General Nicholson on the situation in Afghanistan. Here's a question that he was asked by
Thomas Gibbons-Neff from the Washington Post during the December 2, 2016
briefing:

"And the second question on the -- the Afghan Air Force, talking about how
that's kind of a capability you guys are constantly building and heavy relied
on the MI-17 fleet by far, the most experienced fleet in the Afghan Air
Force. And there's been some reports that you'll -- you'll be replacing
them with Black Hawks.

How does that kind of factor into keeping this force going forward without
taking two steps back?"

Here's is the General's response:

"Right.
So the -- the -- as you know, the decisions on the MI-17s were made prior to
Crimea, prior to Ukraine, prior to the international sanctions on that.
So the Afghans traditionally had a core of MI-17 pilots who were trained on the
airframe and some of them very experienced. So early before Crimea,
Ukraine, before sanctions, there was international support for continuing with
Russian-made airframes.

That all changed after 2014 and after those sanctions were imposed. So
the issue now is the sustainment of that -- of that fleet to continue while we
field a new fleet. President Obama forwarded to the Hill a request and
the supplemental for purchase of UH-60 alpha model helicopters. So these
helicopters will be modified with an improved drivetrain transmission so to
enable them to operate better in the environment up there. But it will
involve a transition for the pilots.

So in addition to the equipment that's being purchased -- so it's not just the
UH-60, it's also more A-29s, more MD-530s. So an increased close air
support capability, an increased lift capability and then a transition program
for the pilots and for the maintainers. So I already mentioned in my
opening remarks about the -- fielding 120 Afghan tactical air controllers, so
they're out in the field able to start doing this.

So it's a -- it's a comprehensive program to not only get the airframes there,
but the -- but the pilots trained, the maintainers trained, the -- the attacks
trained so that we'll field a complete capability. And then -- and then
during this period, we need to sustain the MI-17s long enough to bridge through
this period. So we're getting help from some allies on this and partners
on the this, the Australians, others are helping to fund maintenance on the
MI-17s to -- to enable them to bridge this period until the UH-60s are fielded." (my bold)

Here's the
followup question:

"But
ideally, they'd want to keep the MI-17s, correct, because this is a step back
as far as having to retrain pilots?"

Here again is the
General's response:

"Well, the
MI-17s are a great airframe that the Afghans use and they're comfortable
with. The -- the issue's gonna be the ability to maintain them. And
so this -- so maintaining the airframe -- you know, keeping the airframe in the
inventory but not being able to maintain it was not -- would not be
positive. And so the -- the Afghan government has gone to the Russians
and asked for their assistance in this. The Russians have not provided
it.

And -- and so the Afghan government solicited from them help with maintaining
these airframes. They haven't -- they have not agreed to do it. And
because of the sanctions on Russia, the maintenance of this fleet's gonna be
very difficult." (my bold)

Apparenlty, this is yet another fine example of unintended consequences of questionable political policies and, as you will see, a very expensive example.

Let's
summarize. The American military picked the Mi-17 as the helicopter of
choice for Aghanistan (and let's not forget Iraq) because it was most suitable for the existing pilots in the Afghanistan
Air Force, closing the purchase in November 2014 which was actually seven
months after the residents of Crimea voted to declare independence from Ukraine
and rejoin the Russian Federation. The first round of American sanctions
against Russia were invoked on March 6, 2014 followed by a second round which
banned business transactions with Russia on April 28, 2014 and a third round
which was imposed on July 17, 2014. Despite that, the United States
continued with its purchase of Mi-17s despite the sanctions and now finds
itself in a situation where it can no longer get parts necessary for
maintenance because of sanctions that Washington imposed on Russia. To get themselves out of this mess, the Department of Defense plans to replace the Russian-built Mi17s with the Blackhawk UH-60 which is manufactured by
Sikorsky Aircraft, an American aircraft manufacturer located in Stratford,
Connecticut which is now a unit of Lockheed Martin, America's largest
defense contractor. According to Aeroweb, the unit cost of a Sikorsky
UH-60M in fiscal year 2015 was $16.96 million (flyaway cost) without
armament. If the existing Afghani fleet of 63 Mi-17s were replaced
one-for-one with UH-60s, it would cost U.S. taxpayers a total of $1.07 billion
not including armament costs and the cost of retraining the Afghanistan Air
Force pilots.

In its last full year, Lockheed Martin has spent $3.615 million on getting Washington to see
things its way, putting it in 13th place out of 3,623 lobbyists. As well,
it contributed an additional $6,103,241 to political campaigns during the 2016
cycle, putting it in 51st place out of 18,184 contributors.

One really
doesn't have to think too hard to gain an understanding why Washington is suddenly
changing course mid-stream when it has just finished taking delivery of
hundreds of millions of dollars worth of new Russian-built helicopters at the
end of 2014. Looking at the acquisition dates in relation to the dates that Washington imposed sanctions on Russia makes one realize that American voters have a very good reason to be cynical about their political leadership who is quite adept at speaking out of both sides of their mouths....at the same time.

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About Me

I have been an avid follower of the world's political and economic scene since the great gold rush of 1979 - 1980 when it seemed that the world's economic system was on the verge of collapse. I am most concerned about the mounting level of government debt and the lack of political will to solve the problem. Actions need to be taken sooner rather than later when demographic issues will make solutions far more difficult. As a geoscientist, I am also concerned about the world's energy future; as we reach peak cheap oil, we need to find viable long-term solutions to what will ultimately become a supply-demand imbalance.